back to blog homepage

Where Is The Love? Not From The Stock Market


I thought it would be instructive to take a look at the world’s markets year-to-date. Its pretty clear that even though we hear most about the S&P 500, it has been the least hard hit of all the investment markets in the world. The worst performing market we follow is the Brazilian stock market, down 33% year-to-date. Switzerland was down marginally more than our own S&P 500, with the Europe/Australia/Far East Index down just a bit more than that. Our own small cap market down 22%.

Flat out, its been an ugly time to be in the stock market, but as you can see in the chart below, most of the damage has happened since the beginning of July.

S&P 500 Index Annotated

In looking at this chart, you can see that two days ago we bounced off the bottom of the range defined by the mid-day low on August 9th, and have rallied back above the important pink support line. This is a pretty important thing from a technical perspective.

From a fundamental perspective, though, things are a mess. The stock market seems to be pricing in a recession. If you look at projected 2012 earnings, the S&P 500 Index is projected to earn $100 per share (the weighted average for its components). If we are trading around 1120 on the index, that means we are at a P/E ratio of 11, near the bottom of our standard 10 to 22 range, and well below the average of 15.

However, this is the strangest recession call I’ve ever seen. You don’t get recessions when there are such positive things happening as:

1. New car sales for GM were up 20%, Chrysler up 27% and VW up 36% – it doesn’t sound like the consumer is pulling back as they would during a recession

2. The Purchasing Managers Index increased to 51.5, showing that manufacturing activity was on the increase – it doesn’t sound like corporate managers see things pulling back

3. Rail Car load growth is up strongly year-over-year: For the week, y/y carload growth by rail were as follows:

• KSU: +9.2%
• CNI: +3.8%
• BNI: +3.2%
• NSC: +1.6%
• CP: +1.4%
• UNP: +1.4%
• CSX: +0.4%

These are not the sort of things you see if an economy is on the verge of contracting – particularly since four of the five biggest increases of the year have occurred since August 20th.

4. There has been a large gain in the number of newly hired employees if you add up the past three months non-farm payrolls.

5. The weekly jobless report last week showed a significant decline of 37,000 to 391,000 the best number in several months.

6. Sales figures for companies like Nike, Tiffany, Coach, etc., are all strong again showing that the consumer is not afraid to spend.

7. New Home Sales numbers have also seen five months of improvement.

8. In Emerging Markets, China’s PMI came in better than expected and Brazil has begun to cut its interest rates – both signs that each economy has potentially been able to engineer a soft landing that would eventually translate into higher stock prices in the emerging markets.

9. The Baltic Dry Index, which represents raw materials and goods being shipped across the oceans, is also moving significantly higher, indicating that economic activity around the world is increasing (see chart below).


10. From an anecdotal standpoint, I’ve had friends in both Las Vegas and Disney World in recent weeks, and they tell me that both were packed – also not a sign that the consumer is retrenching.

Is this a New Age Recession where consumers and corporate America is improving but stock prices go down? What’s driving the stock market? Is it telling us that the problems in Europe are going to be worse than the average consumer or corporate manager expects and will drive the US into a recession in sympathy with Europe?

At this point, I think that fear and computerized trading have overpowered fundamentals. I really think we are in a bottoming process and that stock prices will work their way higher as earnings season gets underway in a couple of weeks.

We still have a target area to begin to raise cash denoted by the pink box on the chart above, but at this point we are holding on to our fully invested position in the theory that higher prices are ahead once earnings season gets underway. The signs that things are improving just seem too pervasive for me to believe we are at the cusp of a recession.

I’m not feeling the love from the stock market right now, but I sincerely believe that once earnings season gets here I’ll feel it.